Heikin Ashi Charts and How to Use Them

Heikin Ashi charts are an alternative to standard candlestick charts. They are useful in identifying places where the market is trending. This makes them ideally suited to scalpers, swing traders, and day traders.

Heikin Ashi Explained

Regular candlestick charts are intuitive and easy to use. Each candlestick simply represents the open, close, high and low that the price made during a time interval.

With a Heikin Ashi chart, each candle doesn’t just include information about the price at the current time interval. It also brings forward information from the past.

And because each HA candle uses values from the last one, the first HA candlestick has to be initialized. Conventionally this is done by using the open, high, low and close at the first bar in the chart (or the start point).

The figure below shows two sets of candlestick patterns. The top one is a Heikin Ashi chart and the lower is a standard candlestick chart.

How To Interpret Heikin Ashi Candlesticks

At first sight the charts look quite similar. If you look closely though there are some important differences. The first big difference starts at candle #4.

The HA candle is showing a doji type pattern which marks indecision and a possible reversal. Yet the candle on the standard chart has already started to rise at this point. This is marked with a long bullish white candlestick.

Similarly, at candle #6, the Heikin Ashi chart is still rising, whereas the standard candlestick chart is displaying a bearish hammer.

The second big difference is the length of the candlesticks. A Heikin Ashi candlestick is always either the same size or bigger than the standard candlestick at the same chart position.

Finally, at candlestick #14, the standard chart shows a small bearish candle. The Heikin Ashi chart however shows something completely different. It’s showing a strong bullish candlestick – because it’s incorporating some of the strength of the bullish candle just before it.

So what does all of this add up to? The Heikin Ashi system is averaging out some of the price changes because it is combining information from the past. Standard candlesticks only incorporate information from the current time interval.

This carry forward property makes HA charts a hybrid between regular candlestick charts and moving averages. But unlike moving averages which have a finite averaging period, each HA candlestick is connected to every one before it, however far in the past.

Once again if we take a look at Figure 1, the Heikin Ashi chart is grouping together bullish and bearish candlesticks into clusters. It does this by filtering out some of the noise at each time interval.

This averaging can make it easier to understand the price action on a shorter time horizon. That is, with HA charts it is easier to spot places where the market is trending in the short time horizon.

Figure 2 shows a USDJPY one hour chart. The top chart is a standard candlestick chart, the middle is a Heikin Ashi chart, and the lower is smoothed Heikin Ashi chart. Notice how the trends stand out much more clearly in both the HA chart and the smoothed HA.

The Heikin Ashi indicator isn’t shipped with Metatrader, but you can download it and install it yourself by going to the Metatrader website.

Smoothed Heikin Ashi

With standard Heikin Ashi, the candlesticks are derived from the price. An alternative to this is known as smoothed Heikin Ashi. With smoothed Heikin Ashi, the formula uses not the price but points on the moving average line. This adds an extra level of smoothing. The first is the smoothing of the moving average itself and the second is the averaging at each HA candlestick.

The smoothed Heikin Ashi chart looks more like a regular moving average line when the moving average period is large. The main difference will be that you’ll see colors where the trend is rising or falling. This makes it helpful for visualizing trends. See Figure 2.

How to Recognize and Trade Heikin Ashi Patterns

We trade Heikin Ashi much like a standard candlestick chart, but just obey a few simple rules.

Rule 1: The first is the rule that the Heikin Ashi candle will always be either equal in size or longer than the standard candle at the same position. This means the Heikin Ashi candle can display a level which the market never actually reached at that time. For example, see candle #3 in Figure 1. Just like a moving average line, if a HA candle pierces a support or resistance line, the price may not necessarily have crossed that line.

Rule 2: The second rule is that Heikin Ashi candles incorporate some delay because of their averaging properties. This can be both good and bad depending on the way you look at it. It means you’re more likely to see groups of bearish or bullish candles and be able to identify those as trade entry or exit points. On the flip side, the averaging causes a lag in response so that the HA candles start to react slightly later than regular candles when a trend changes direction.

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Disclaimer: This is not investment advice. Forex, options, futures and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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